3 Pieces of Investing Advice from a Billionaire Fund Manager – Part 3

When it comes to money management, David Einhorn’s likely one of the best in the business. This is why: Since Einhorn stared his investment firm Greenlight Capital in 1996, it has generated an annualised return of just over 19%.

To put that number into perspective, a $1,000 investment in 1996 that’s compounding at 19% would have become nearly $23,000 by 2014. Einhorn’s achievements as an investor has led him to accumulate a fortune of some US$1.75 billion today, according to Forbes.

Recently, I chanced upon an old January 2011 interview that my Foolish colleague John Reeves had conducted with Einhorn. There are two parts to the interview (see here and here) and it contains some great takeaways for retail investors like you and me.

For the sake of brevity, I’ve broken the takeaways into three parts. Here’s one of them.

On the need to not follow even the best investors blindly

“Reeves: Can you give us an example of a long idea where you see something the market does not?

Einhorn: Yes, one is Delta Lloyd — it’s a Dutch insurer. The market is focused on its low growth prospects, and on its ability to sell insurance to new customers. The market fails to see its ability to manage its resources well.

Overall, it’s a well-run business that has been able to increase its book value significantly. Despite being able to grow its book value, its stock price is lower than where we bought it. At about half of book value and six times earnings, it is the only stock in my portfolio that I think if it doubled, it would still be cheap.”

Here’s a chart of how Delta Lloyd’s share price (blue line; left Y-axis) and book value per share (green bars; right Y-axis) have changed since Einhorn’s January 2011 interview:

Delta Lloyd share price and book value per share

Source: S&P Capital IQ (click chart for larger image)

I’m not privy to what Einhorn has bought and sold over the last four years, so he may well have made a decent profit on Delta Lloyd’s shares during that period. But, if he has held on till now, the investment would have been a painful one. What’s also interesting to note is that Delta Lloyd’s growth in book value – which appears to be a central part of Einhorn’s thesis – had been nonexistent in the period under study. Instead, the insurer’s book value per share has fallen by more than half.

I’m not stating all these as a criticism of Einhorn. That’s far from it – in fact, I think he’s a phenomenal investor given his long-term track record of investing excellence. The point I’m trying to make here is that even the best investors make mistakes and it’s wise to not follow along blindly. That’s especially so if you’re tagging along with just one or two ideas from an investor.

Peter Lynch, another legend in the investing world, once said that even the best in the business get only six decisions out of 10 correct. Piggy-backing the pros is not necessarily the wisest thing to do – but if you really have to, please be at least aware of this.

That’s all for now. For the other two parts, check out below!

On the need for investors to protect themselves – check out here.

On the need to dig deeper into your own investments – check out here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.